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Omit It, And IRS Can Audit You Forever

Before you file your taxes, consider how long you must look over your shoulder. In many cases, the IRS has three years to audit. The three years is doubled to six if you omitted more than 25% of your income. Plus, the IRS now has six years to audit if you overstate basis and it has the effect of understating your income by more than 25%. The three years is also doubled if you omitted more than $5,000 of foreign income (say, interest on an overseas account).

But the exceptions from the three year rule get even worse if you miss certain forms that apply to you. If they apply, don’t omit Form 3520 for gifts or inheritance from foreign nationals, or Form 8938 for overseas assets. If you don’t file, the IRS clock never starts to run. More generally, the IRS has no time limit if you never file a return. For unfiled tax returns, criminal violations or fraud, the IRS can take its time. In most criminal or civil tax cases, though, the practical limit is six years.

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If you miss some tax forms, the IRS can audit forever, and occasionally they do try to reach back 10 or more years. When a U.S. shareholder owns part of a foreign corporation, it can trigger reporting, including filing an IRS Form 5471. It is an understatement to say this form is important. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, incomplete or inaccurate. This penalty can apply even if no tax is due on the return. That is harsh, but the rule about the statute of limitations is even harsher.

If you fail to file a required Form 5471, your entire tax return remains open for audit indefinitely. This override of the normal IRS statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. In fact, the IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed.

Think of a Form 5471 like the signature on your return. Without it, it really isn’t a return. Forms 5471 are not only required of U.S. shareholders in controlled foreign corporations. They are also required when a U.S. shareholder acquires stock resulting in 10% ownership in any foreign company. The harsh statute of limitation rule for Form 5471 was enacted in 2010, part of the same law that brought us FATCA, the Foreign Account Tax Compliance Act.

The possibility that the IRS can audit forever is chilling. The potential for large civil penalties and perhaps even criminal liability can be real. Consider your audit exposure before you file.

For example, if you don’t sign your return, the IRS does not consider it a valid tax return. That means the three years can never start to run. Another big no-no is if you alter the penalties of perjury language at the bottom before you sign. If you do so, it also can mean the tax return does not count.

Every year it seems that Federal lawmakers make changes to the tax code.This year is no exception!Click image below for some of the tax changes that could affect you;

Guide to Changes in the Tax Laws for 2016

These moves may sound like tax protester statements. However, some well-meaning taxpayers forget to sign or may unwittingly change the penalties of perjury wording. Some other taxpayers just miss a form to end up in audit purgatory. An example of the latter can arise if you have an offshore accounts held by a company. If you miss one, the IRS can audit you forever.

If you file early, do you shorten the audit period? Normally no, the IRS audit clock starts running on the later of your actual filing or the due date. If you file in January and your return is due April 15th, the audit clock starts to tick on April 15th. The time periods can be downright frightening in some cases.

Tax lawyers and accountants are used to monitoring the duration of their clients’ audit exposure, and so should you. Watch the calendar until you are clear of audit. In most cases, that will be either three years or six years. But in some cases, even though you filed and thought everything was in order, the statute of limitations never runs.

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Every year it seems that Federal lawmakers make changes to the tax code. This year is no exception. Below are some of the tax changes that could affect you. Be sure to consult with your tax advisor to better understand and plan for these changes.

Tax penalties related to Obamacare are rising – The Affordable Care Act imposed penalties for those not having qualifying healthcare coverage. Those penalties started at $95 per adult, or 1% of income above the filing threshold in 2014, but they rose to $285 per adult, or 2% of income above the filing limit in 2015. For 2016, penalties will rise again, hitting $695 per adult, or 2.5% of income above the filing threshold. A family maximum will apply to the per-person amount, but the $2,085 amount will be substantially higher than the $975 in 2015.

Standard deductions and personal exemptions are going up – The low inflation rate kept standard deductions for most taxpayers steady in 2016 from 2015 levels, including the single, married filing jointly, and married filing separately statuses. For those who qualify as heads of household, the standard deduction will rise $50 to $9,300 in 2016. The personal exemption that taxpayers are entitled to take on their tax returns will go up in value by $50 in 2016. That will give everyone an exemption amount of $4,050.

Contribution limits on health savings accounts go up – Health savings accounts let people with high-deductible health plans set money aside on a pre-tax basis to cover the costs of their healthcare. For 2016, the contribution limit for individual policies will remain at $3,350, but the maximum contribution for family policies will rise by $100 to $6,750. A catch-up contribution of $1,000 for those 55 or older will continue to apply.

The Earned Income Credit goes up – The maximum allowable Earned Income Credit will go up modestly in 2016. For those with three or more qualifying children, the maximum credit will rise to $6,269, up $27. Those with two children will get a maximum $5,572, which is up $24 from 2015, while one-child families can get up to $3,373, $14 more than last year. Those without children get just a $3 bump and can claim up to $506 for 2016.

The exemption from AMT and the estate tax exemption are higher – The alternative minimum tax (AMT) has impacted a growing number of taxpayers, making the exemption amount more important than ever. Single taxpayers will see their AMT exemptions go up $300 in 2016 to $53,900, while joint filers will see a $500 boost to $83,800. The lifetime exemption amount for the gift and estate tax is tied to inflation, and it is slated to increase next year as well. The exemption amount will rise to $5.45 million—up $20,000 from 2015. The limit applies to estates of those who pass away in 2016.

Bespoke tax advice and compliance services, wherever you choose to live in the world.

Using our network of international offices around the globe, we help clients by preparing US and UK tax returns. Our team has the expertise to navigate these complex tax systems and to ensure that those with international elements to their financial and tax affairs are fully compliant and are able to take full advantage of the allowances available to them.

Sound and expert advice on all aspects of UK and US tax planning.

US Citizens

US citizens are subject to US income tax as a result of their citizenship and not their residency. This means that if you are a US citizen living outside of the United States, you will still need to file a US tax return (subject to certain thresholds) and possibly pay US income tax on your worldwide income.

There may also be an obligation to file US foreign bank account forms if the combined maximum balance for all of your non-US bank accounts amount to more than $10,000.

Green card holders

US Green card holders have a US tax return filing obligation (subject to the thresholds above) no matter where they live. Green card immigration status remains with you until you formally renounce your green card.

US resident aliens

If you are resident in the United States (as determined by a “days of presence” test) you are required to file a US tax return to report your worldwide income (subject to the thresholds).

Non-resident aliens

In US tax terms, this is everybody else in the world not detailed above. If you are a non-resident alien but have US source income of almost any type, you will need to file a non-resident US tax return (1040NR).

What services are available?

US federal tax returns

US tax returns for US citizens and Green Card holders must include worldwide income, which will often necessitate a claim for a credit for the tax paid in a foreign county (foreign tax credit) and /or a claim for the foreign earned income exclusion. US tax returns for individuals living outside of the US tend to be quite complicated and normally require a specialist tax preparer to complete them correctly.

US federal income tax returns for non-residence US source income are reported on a separate form and can be just as complex. We have the expertise to ensure your non-resident return is completed correctly.

US state tax returns

The majority of US states have their own income tax systems with separate tax returns to be filed. Many of these states do not have minimum filing thresholds, therefore as little as one work day in the State could trigger a filing requirement. Filing requirements will also arise if an individual earns various types of investment income depending on the nature.

Foreign bank account reporting

US persons with interests in non-US financial accounts have an increased reporting requirement as a result of the FATCA rules. We can help simplify all aspects of this process.

Advice

We can provide advice on all types of US income tax queries and estate planning.

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Among the funds that hold Puerto Rican debt, some of the largest are run by Oppenheimer Funds and Franklin Templeton.
For example, the Franklin Double Tax-Free Income Fund (FPRIX) holds nearly half of its investments in Puerto Rican bonds.

The biggest fund at stake is Franklin’s $229 million Double Tax-Free Income Fund, or FPRTX, which directs 47 percent of its assets to commonwealth securities.
That’s the largest allocation among muni mutual funds, according to Morningstar.

Numerous Oppenheimer Rochester municipal funds hold 15% or more of the fund in Puerto Rican bonds, including the Oppenheimer Rochester MD Municipal Fund (ORMDX)
Oppenheimer held $4.6 billion of Puerto Rico securities, about 17 percent of its assets, as of April, according to Morningstar.

Franklin held $2.3 billion—for a 3 percent allocation to Puerto Rico—as of April.

American citizens offshore can now enjoy alternative ways to invest money that could potentially reward attractive tax advantages, whilst remaining in-line with US laws and regulations.

It can generate much more savings than any traditional retirement vehicle

You can access your money 10 years earlier, from the age of 50

Tax free lump sum withdrawals available for 30% of the pension fund value

No maximum on contributions, e.g think uncapped Roth IRA

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Full gross roll up for compounded investment returns

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And even though this contract based personal contribution retirement plan can generate a lot more cash than IRAs, your typical 401(k), or even Obama’s newly proposed MyRA (a short way of saying “My IRA”)…

Most people haven’t heard about these plans for one simple reason,

This has not been available to the public until recently, which could forever change the way people in America retire. The problem is, the average citizen just doesn’t know about it, yet.

Keep in mind, it’s a way for you to secure consistent income in a far more profitable & tax efficient way for retirement.

According to the Federal Reserve, the value of a typical 401(k) is about $120,000. That’s almost nothing if you’re looking at retiring anytime soon.

This is a lot less than the amount you could collect through compounded growth by deferring taxes for gross roll up with after tax dollars.

If more Americans knew about these plans, we wouldn’t be looking at a time when ordinary people are forced to work into their 70s (or even 80s).

But here’s what’s really mind-blowing…

99% of the investing public still have no idea these plans even exist…

If you’re interested, I’ll give you all the details to know if it’s right for you.